* Repeats Tuesday item without changes
By Sujata Rao
LONDON, June 24 An easing in sanctions-related
tension with the West is allowing Russian companies to explore
global bond markets after a four-month hiatus but they must
prepare to pay up to lure investors.
After bond buyers last week shrugged off concerns about
militant attacks in Kenya and Ecuador's serial defaults, it
seems unlikely that bond issues from Russia's mighty state-run
companies can fail.
In fact, privately-owned Alfa Bank had already broken the
lull in issuance earlier this month with a 350 million euro
($475 million) deal that was more than three times subscribed.
But this week's offering from Russia's biggest lender
Sberbank could be the one that really unleashes a flood of
pent-up bond issuance, including from state-run companies that
until recently looked set to bear the brunt of Western sanctions
imposed in retaliation for Russia's annexation of Crimea.
Sberbank raised 1 billion euros in five-year bonds,
receiving orders for double that amount. That might pale in
comparison with, say Kenya which took orders of almost $9
billion for a $2 billion bond, but is pretty healthy for what
would almost have been a pariah credit a few months back.
"Demand is hot in the asset class and there is always a
price for everything, so if the Russians are willing to pay they
can get deals done," said Max Wolman, a fund manager at Aberdeen
Asset Management. "People also feel now there is not much threat
of sanctions from Europe."
A European Union foreign ministers' meeting on Monday
revealed there is little concerted support for tougher sanctions
on Russia which supplies energy to much of the bloc.
And Sberbank was indeed willing to pay 3.35 percent for
five-year euro cash, equating to a 20 basis-point-plus premium
over its 2019 dollar bond based on spreads over mid-swaps, the
benchmark used for calculating the total cost of issuing a bond.
That contrasts with many other Russian issuers whose euro
debt offers no spread premium over dollar bonds.
Sberbank also paid a decent premium over the euro issues of
other state-run lenders such as Gazprombank and VEB.
"I calculate the premium (on Sberbank's dollar issue) as 40
bps on a spread basis, which I think is sufficient and second,
oversubscription ratios tend to be lower in euros than for
dollar new issues," Jefferies analyst Richard Segal said.
"Third, there have not been many euro-denominated bonds from
Russian banks, but one comparison is Gazprombank, where on a
like-for-like basis there is 15 bps extra spread in dollars."
Gazprombank is meeting investors this week. The
vice-chairman of VEB, Alexander Ivanov, said the bank wanted to
see what reception its peers got before embarking on its own
RECOVERY BUT PROBLEMS
Russian companies face around $150 billion in debt payments
in 2014 but with half the year gone, they have raised just $6
billion on bond markets, Thomson Reuters data shows, less than a
quarter of year-ago levels.
But two factors are on their side.
First, Russian assets have recovered strongly in the past
month as prospects of full-fledged war with Ukraine and
crippling U.S. sanctions have receded.
Second, with U.S. yields around 40 bps below end-2013 levels
and the Federal Reserve in no hurry to raise interest rates, any
asset that provides an extra few basis points of yield will be
popular, whether a junk-rated euro credit such as Cyprus or a
first-time frontier issuer such as Kenya.
On the other hand, U.S. sanctions risk has not entirely
abated, meaning firms may be restricted to euro issues where the
investor base tends to be smaller than the dollar market.
"Russia is something we are treading carefully with," said
Angus Halkett, a portfolio manager at Stone Harbor, a U.S. fund
which has little exposure to Russian corporate debt.
"Any entity that's not a sovereign but is close to the
sovereign could be implicated if there is an escalation of
sanctions," Halkett said of companies such as Sberbank.
NO LONGER ATTRACTIVE
And finally there are many investors, U.S. or European, who
want to have nothing to do with Russian debt simply because they
no longer view Russia as an attractive story.
French asset manager Carmignac Gestion has slashed exposure
to Russian company and bank debt and has no plans to raise it,
says Sandra Crowl, a member of the investment committee.
"To go into Russian corporate debt would mean we were
confident in two things - the Russian banking system and the
disclosures we are getting from Russian companies," Crowl said.
"But we are not (confident). Russia has been through
extensive credit expansion and non-performing loans are going to
With the economy and foreign investment unlikely to grow
this year, interest rates up 200 bps and Ukraine-related losses
racking up, profits have plunged at major banks. Sberbank, for
instance, posted an 18 percent fall in net first quarter income.
VTB's first quarter profits fell a whopping 80 percent and
provisions for bad loans more than doubled.
"Given the risk of sanctions is also a consideration, our
exposure to Russian corporate debt is near zero and we don't
have any inclination to increase that," Crowl said.
($1 = 0.7357 Euros)
(Additional reporting by Sudip Roy of IFR; Editing by Ruth